Taxpayers in every income category will save tens of millions of dollars because of state tax reforms enacted in North Carolina in 2013. In addition to benefits for every income group from last year’s reforms, the conservative-led N.C. General Assembly is also responsible for a 2011 states sales tax rate reduction. Combine the 2011 and 2013 reforms, and lower- and middle-income households will enjoy annual savings of $682 million. Dr. Roy Cordato, John Locke Foundation vice president for research and resident scholar, discussed a report on the impact of recent state tax reforms with Donna Martinez for Carolina Journal Radio. (Click here to find a station near you or to learn about the weekly CJ Radio podcast.)

Martinez: Pretty fascinating data — very good data. It may surprise some people, Roy, because the media narrative on this tax information has been, well, basically [that] the legislators cut taxes for wealthy people. Not so.

Cordato: Yes. And beyond that, cut taxes for wealthy people on the backs of lower-income people. But, of course, this study, which was done for us by the Beacon Hill Institute at Suffolk University in Boston, shows that the recent tax reforms in 2013 will reduce taxes for all income groups, starting at below $25,000 a year — households below $25,000 a year — all the way on up.

All of those households will be paying lower taxes as a result of the 2013 tax reform. And if we include in that … all the tax declines that can be attributed to actions taken by the Republican legislature starting in 2011, that [tax savings] expands even further. And, in fact, it ends up being, if you look at the 2011 … changes to the sales tax, it becomes overwhelmingly favorable to low-income taxpayers because they really got the benefit of that decline from 5.75 percent sales tax to a 4.75 percent sales tax.

Martinez: And yet, Roy, there have been some progressive advocates who continue to criticize, in fact have reacted to the Beacon Hill report and your analysis of it, saying that, “Well, you haven’t factored in everything, and so that’s not really true.” Tell us about that.

Cordato: Well, they’re lying. They’re lying. The fact is — and I’m sure they haven’t looked at the study or, if they have, then it’s particularly egregious — we include the sales tax expansion — in this study — to things like movies, and we include the elimination of the earned income tax credit in this study. And despite those changes, which can be considered tax increases in this reform, overall, because of the decline in the income tax rate, and especially for the dramatic increase in the standard deduction, households in lower-income groups are going to benefit from this. And if they say that we are not including those other things, they’re simply making that up.

Martinez: Roy, this is wonderful news across the board as you have described. Now, of course, that doesn’t mean that every single person or household will find that they are benefiting, because nothing is 100 percent absolute. But this is wonderful news. So why didn’t North Carolina do this sooner?

Cordato: Well, look, tax reform is not easy. When you do tax reform, you have lots of interest groups competing and lobbying the legislature to keep their benefits. Part of tax reform is to eliminate special tax breaks. Broaden the base. Lower the rate. And that’s what they did.

But when you do that, special-interest groups lose their favors, and it makes it very difficult on legislators to put through a tax reform. And I think the legislature needs to be commended for doing this in 2013. It’s not perfect. Certainly we at the John Locke Foundation think that it could’ve gone further in different directions, that there are additional reforms that need to be put in place. The tax base still needs to be changed somewhat, but this is a huge first step.

Martinez: Well, let’s talk more about those reforms that you would recommend. What should be the next thing the legislature does?

Cordato: What we would like to see happen is to take another look at the income tax and start to move toward a consumption-based income tax. Right now our income tax taxes savings and consumption unequally. It double-taxes savings. Our proposal is to pull savings out of the tax base, kind of like you would do with an [individual retirement account], for example, at the federal level, but make that applicable to all savings.

Pull that out of the tax base so what you’re left with is money you consume, and it would become a consumption-based income tax. That would eliminate the penalty that’s in place in North Carolina’s income tax system against saving, investment, entrepreneurship, and, therefore, against economic growth.

Martinez: Let’s make sure that everyone understands what we’re talking about here because most of us are not economists like you are. When you say consumption, are you saying when we buy something, that would be when we pay tax?

Cordato: Yes. And if you think about it, what we do is — leaving out charitable giving for the moment — we do one of two things with the dollar that we earn. We either save it, or we spend it. And the consumption is spending, the spending part of that. So what we argue for is if you save it, it should be pulled out of the tax base until you take it out of savings and spend it. Just like, as I said, like an IRA would work, except there would be no penalty for early withdrawal, and it would having nothing to do with retirement.

Martinez: Those are the federal IRA rules you’re referring to.

Cordato: Right.

Martinez: What about the corporate income tax rate in North Carolina? What did the legislature do with that, if anything, and what should they do further?

Cordato: They’ve done a lot with the corporate tax rate. For one thing, they’ve gotten rid of lots of these special privileges in the corporate tax, which was just riddled with special privileges and reductions for some. They’ve gone from this very high corporate tax rate of 6.9 percent, ultimately down to 5 percent next year. And if certain revenue targets are met, it will go down to 3 percent.

That is a huge step, as I said, when you think that the starting point is 6.9 percent — clearly the highest in the region. Clearly we think it should be eliminated totally, but if they get down to a 3 percent rate, we will be very happy with that.

Martinez: Roy, whenever we have a discussion about taxes, you hear people use the word “fair.” It should be “fair.” What’s your definition of fair tax reform?

Cordato: I think fairness starts with the North Carolina Constitution, Article 1, the very first thing you see in the North Carolina Constitution. It says that, like the Declaration of Independence, it says that we are — we all have inalienable rights to life, liberty, and property. But then our constitution goes on to say, to add to that, the right to keep the fruits of your labor.

So it defines fairness in our constitution, in our state constitution, that a tax system that allows you to keep as much of your rightfully earned income as possible is a fair system. To go beyond that, to take away from you what you’ve rightfully earned is clearly, in my mind, unfair.